What Can Religion tell us about Economic Development?

Although Adam Smith delved into religion in his 1776 Wealth of Nations, mainstream economists have historically stayed clear. This has recently changed[i] and as I cycled through the Holy Land back in April with fellow economist & stoker Mike Biggs, we reflected on whether economics can be used to analysis religious activity and, perhaps more interestingly, whether religion can help to explain regional differences in economic development[ii]

Jerusalem: The geographical starting point for any discussion on (monotheistic) religion & economic development…

Let us start by thinking how we might use economics to consider religion? By applying a basic supply & demand framework to an analysis, we could assume that that people (‘customers’) are just as rational in their choices about religion as they are about, say, buying a car. "Producers" of religion -- churches, synagogues, and mosques – compete for these "customers" by seeking converts, drawing members from other congregations, or combating the pull of secular society.

Drawing on the theory of the firm, we might say that there isn’t ‘perfect competition’ rather this is an oligopolistic market where the 3 major religions, ignoring the various sub-sectors, control some 90% of the (Western) market, with product differentiation a common feature. Of course, when it comes to making religious (& other) choices, people aren’t necessarily rational but you get the idea! Note that the concept of rationality has also been extended to explain the behaviour of certain suicide bombers[iii].

My tandem parked beneath an (old) poster in the Palestinian West Bank remembering a fighter killed during the 2nd Intifada (2000-2005). Suicide bombings occurred during this time…

The second question addressing what religion tells us about economic development is perhaps more contentious. Firstly, whilst it is generally perceived that greater economic development, as measured by growth in per capita GDP is associated with reduced religiosity, measured by participation in organised religion, the direction of causality is not clear cut. Is it that rising incomes lead to a fall in religious participation or that religious participation hinders economic growth. We could use the concept of opportunity cost (of time intensive activities) to think about this. For now, I will defer to the conclusion of the likes of Robert Barro & Rachel McCleary from Harvard (iii) who suggest that economic growth responds positively to the extent of religious beliefs but negatively to participation in organised religion.

Why is this? Their first conclusion stems from Max Weber’s famous thesis in ‘The Protestant Ethic and the Spirit of Capitalism’[iv], namely that religious beliefs raise productivity by fostering individual traits such as honesty, work ethic, and thrift. Meanwhile, spending too many resources (time, income & talent) on religious activities reduces those available for (economically) productive activities.

However, most of the recent studies concern the relationship between religion & growth in modern history. It occurred to me whilst in Egypt that well organised religion can help to promote strong growth in early stages of development. Egypt was more developed in 1500bc then than Europe 3000 years later. We can still see evidence of their development in the magical tombs & temples we can see today.

The temple of Queen Hatshepsut: she was ahead of her time. Help me build this Obelix & you will find salvation …

Egyptian temples were key centres of economic activity, providing employment for thousands of people & managing the trade & agriculture around them. Whilst atheists might argue that this is an early example of how the political elite used religion to persuade the masses to work for them, it helped create a dynamic civilisation that dominated the region for centuries in ancient times.

In more recent centuries, does religion tell us anything about regional differences in development? This is where the debate becomes more controversial! Why was the industrial revolution led from Northern Europe – a largely Protestant Christian region and not either the Islamic or more Catholic areas of the (old)world. Was modern capitalism born through the religious ideas of the Reformation? It allowed for the separation of church & state, enabling a greater plurality of religious faiths in society & an atmosphere of “good temper and moderation”, as Smith put it. Entrepreneurs were able to build enterprises & make money with a clear conscience, whilst the Church encouraged hard work & frugality amongst workers.

Meanwhile the largely Muslim Arab world developed more slowly. Of course, there are many other factors at work but academics argue that religion played a part. For example, Timur Kuran of Duke University[v]highlights that Koranic inheritance law long forbade a father from passing a business on to a favored son but required him to divvy up the legacy among all children (with daughters getting half-portions). That made it harder to set up corporations and stymied economic growth. Another hurdle regularly cited is the traditional prohibition on interest payments.

Greater competition for talk time (Sudan desert) & modern banking systems (Jordan banknotes) in 2012. But has economic development in the Arab world been held up by certain religious traditions?

What about the Jewish influence? Although geographically spread out & therefore difficult to quantify the effect of their religiosity on regional growth, Jewish presence in financial services, for example, is well-known. One oft-cited reason for this was the condemnation of usury in the early Christian church, leaving a gap in the market for others to offer banking services. With their history of entrepreneurship, geographical mobility & subsequent network across many countries, Jewish financiers were well place to help bank-roll much of the industrial development in Northern Europe during the 19th Century. The most famous of these were of course the Rothschilds – still prominent in global banking today[vi].

It seems appropriate, given my journey, to touch on Africa before finishing. David Livingstone, the famous Victorian missionary cum explorer, believed vehemently in African economic development coming through the ‘three C’s’: Christianity, Commerce & Colonisation. For the basis of this discussion, it is impossible to determine whether religion has played much of a part in hindering or helping growth in Africa. Certainly, the (European) scramble for Africa in the late 19th century & tensions between Christians & Muslims throughout Africa’s modern history have proved somewhat of a hindrance to development in general.

A Christian family that I camped with in South Sudan. Their extreme (material) poverty is not quite what Livingstone had in mind 150 years after his death…

So is it possible to draw any conclusions from this discussion? Firstly (& mainly for students!), it is worth remembering that we can (try to) use economics as a framework to analysis any decision-making process. OK, so it is easier to use it to think about buying a house but social choices such as religion can also be considered. Meanwhile, attempting to isolate the link between religion & regional differences in economic development is challenging given the presence of many other significant variables. It can be argued that the industrial revolution & modern capitalism were conceived out of the reformation in Northern Europe, bank-rolled by a Jewish network of financiers across the old world. But to claim this is mainly due to religious development rather than broader cultural, geographic & other socio-economic factors would require a leap of faith for any economist. Moreover, as Max Weber[vii] went on to do, we’d need to broaden the discussion to include the other global religions to answer the question more completely.

[i] Inspired by the work of Nobel Prize winning economist Gary Becker, Laurence R. Iannaccone, Professor of economics at Chapman University is considered one of the pioneers in the field. See also Barro & McCleary, Harvard University (2003), Religion & Economic Growth

[ii] In order to keep this blog (relatively) simple, I’m going to focus on the Abrahamic religions. Of course, this excludes a large & the fastest growing part of the world economy. I’d also like to emphasise that this is meant to stimulate thought amongst students. I accept that I may be making some sweeping generalisations & I hope that I don’t cause any offence in what is of course a most sensitive topic!!

[iii] See for example Religious Extremism: the good, the bad, and the deadly, Iannaccone &Berman (2005)

[iv] Written in German in 1904 & translated into English in 1930, it is considered a founding text in economic sociology

[vi] Due to their geographical mobility & link to European Banking families, Jewish Immigrant families also helped finance much of the rapid industrialisation in the US in second half of the 19th Century. Many of the firms still exist in part today Lazard Freres, Goldman Sachs, Salomon Brothers (now Citi), with a notable exception (Lehman Brothers). See for a detailed account of this, see The Course of Modern Jewish History (1959; updated 1990) - Howard M. Sachar.

About the author

Having worked for 8 years as an economist in the City (Schroders & Citigroup), Stuart transitioned into teaching in 2009 and worked at Cranleigh School in the UK until 2013. His year long cycling venture helped to build and consolidate links for Cranleigh with Kawama School in Kitwe, Zambia. He has recently moved back to London to set up an economics department in Morpeth School in Tower Hamlets, London.